Fractional Ownership: Making Expensive Commercial Real Estate Affordable For Retail Investors

Fractional ownership has now emerged as a new trend in the commercial real estate industry, opening up ways for retail investors to invest in commercial properties. 

It has made investment in such properties affordable for retail investors, as the total cost of the property is shared in a ratio determined by the buyer’s contribution in the total price paid for that property. It allows sharable profits and collective payment of costs that may other bore a hole in a sole investor’s pocket. These costs would normally relate to mortgage, property tax, and maintenance costs, among others. 

Says Karan Shetty, co-founder, Claravest Technologies: “Imagine wanting to invest in a swanky commercial property in Mumbai or a vacation home in Goa, but the cost is far too high for a single buyer. With fractional ownership, you can pool your funds with others to own a share of that property, making it affordable and accessible.” 

Shetty calls this new trend a game changer for retail investors for reasons, such as affordability, diversification, and the opportunity to earn passive income from the property by want of rent. 

Affordability: Fractional ownership drastically reduces the initial investment required to enter the commercial real estate market. Instead of shelling out crores of rupees, one can buy a piece of commercial property for a fraction of that cost by way of fractional ownership. 

This option is beneficial for those willing to enter the real estate market with a limited amount of fund. For beginners it is an easy option to understand the inner workings of the real estate industry, says Shetty. 

Diversification: One can invest in multiple properties across various locations, thereby reducing the overall risk to one’s investment. Should one property underperform, the buyer can take reassurance that the other properties will likely provide good returns. 

Professional Management: Fractional ownership platforms often provide professional property management services, taking care of issues related to maintenance, tenant screening, and rent collection. 

This can be a good option for the elderly or those with paucity of time, but might still want to invest in commercial real estate. 

Passive Income: Fractional ownership platforms allow individuals to create a passive income stream through rental income generation from the asset, along with appreciation in the value of the property. 

This passive income stream makes it a lucrative investment option for senior citizens, especially retirees whose income source is either their savings or pension fund. 

Major Concerns About The Concept 

However, as with any investment, one must be aware of the risks involved in fractional ownership. 

Limited Control: As the decision making is collective and the fraction of ownership may differ in percentage, it can cause conflicts among the owners. 

Says Shetty, “Since you are a part-owner, you won’t have full control over decisions, such as property management.” 

Liquidity Concerns: Due to the illiquid nature of real estate assets, selling your share might take some time, especially if there’s no immediate buyer. 

Real estate is a highly illiquid asset and you may not be able to find a buyer willing to buy out your share at a short notice should you need emergency fund. 

Additional Costs: There are additional costs involved in fractional ownership, such as management fees, facilitation fees or performance fees. However, that gets compensated by the hassle-free experience of owning a property, says Shetty. 

Statistics And Growth Potential 

According to a report by Knight Frank India, the demand for alternative investments, such as fractional ownership has surged in recent years. 

“The fractional property market is estimated to grow at over 30 per cent annually,” says Shetty. 

Legal Considerations 

There are also some legal considerations one must be aware of before deciding to invest in fractional ownership. 

Ownership Agreement: A formal agreement has to be made containing various details, such as the ownership percentage, usage schedule, rights and responsibilities of each owner, among others. This agreement should also define the ownership dilution in case of any disagreement. 

Liability: Property titles are typically held in a legal entity, such as a limited liability company (LLC) or tenancy-in-common arrangement, to clarify ownership stakes and limit liability. 

Profit Distribution: The property’s rental income and potential capital growth when sold are divided based on each owner’s stake in the property. 

Fractional ownership is a revolutionising trend in the Indian real estate industry, allowing retail investors to build a diversified property portfolio through purchase of commercial property in small parcels across multiple properties across multiple places and projects. This makes the dream of commercial real estate investment accessible and affordable for retail investors in the otherwise very expensive world of commercial real estate.